It’s high time for marijuana REITs

The marijuana industry needs financing and real estate for it’s expansion. New REITs spring up to meet the need.

Investing in real estate offers many opportunities to earn high returns — in the case of catering to medical marijuana growers, the “high” is literal. Because the entire industry was illegal not long ago (and technically still is on a federal level), very few support businesses service the marijuana industry.

Growers came out of hiding first, and among the first businesses to service them were retail property owners, generally those who couldn’t find other tenants. For owners of vacant commercial space in bad areas, these tenants were golden because not just did they want the space, they paid a premium for it. This premium survives to this day.

As the industry grows, growers and middleman suppliers face challenges to expansion. Obtaining capital to expand a business that isn’t technically legal is tough, but added to that increasing competition pressures sales prices making income less predictable. Despite these challenges, some groups are taking on the challenge of providing capital and space to this budding industry.

A nascent San Diego real estate firm that aims to own buildings used to grow medical marijuana has filed to become publicly traded on the New York Stock Exchange.

Innovative Industrial Properties, lead by former BioMed Realty Chief Executive Alan Gold, submitted its prospectus Monday to the U.S. Securities and Exchange Commission.

Founded in June, the company is seeking to sell 8.75 million shares at around $20 each for net proceeds of $175 million, according to the prospectus. Innovative Industrial plans to use the money to buy 10 to 20 indoor grow facilities for state-licensed medical marijuana producers in nine states, including California. …

Marijuana growers used to hide plots in the woods and hope the DEA didn’t find them. More sophisticated growers moved indoors where they could control the climate, but hiding a large growing operation carries its own perils.

Now that medical marijuana is legal, indoor growers face fewer regulatory hurdles, but finding a commercial building with a cooperative landlord in a welcoming jurisdiction is still a challenge. These difficulties create opportunities.

Demand for marijuana filters down to growers who need to find a place to grow their product. Since the supply of buildings where they can grow marijuana is scarce, growers pay a premium to rent or buy these buildings, representing an opportunity for developers willing to learn this business.

REITs commonly specialize in specific property types – such as office buildings or strip malls. But Innovative Industrial is going after an unusual niche.

The company believes state-licensed medical cannabis growers sometimes struggle to get bank loans or other traditional financing for their businesses – in part because marijuana remains illegal under federal law. …

This risk further reduces competing supply and raises the potential profit to those catering to the industry.

Of course, risk is more than an abstract idea. The DEA could aggressively enforce current federal law and shut these businesses down, causing investors to lose significant sums.

The company thinks it will face less competition from other REITs and institutional real estate buyers because of the “unique nature of the real estate and its tenants.”

Exactly.

But there are competitors, such as Grow Condos, whose stock trades trades over-the-counter. The Oregon-based company provides condo-style, turn-key grow facilities to cannabis growers.

This industry will also find favor among crowdfunding sources as well, particularly since small investors (who like to get high) may want to invest simply because they like the idea of helping out growers.

The legal cannabis industry grew 17 percent last year to $5.6 billion, according to industry research firm The ArcView Group.

Twenty-six states currently allow medical marijuana, including California. More are expected. In November, California voters will decide whether to join Colorado and a few other states in legalizing recreational marijuana use.

If California legalizes marijuana, growth will be even more robust next year.

While public attitudes toward cannabis may be changing, Innovative Industrial still faces risks. They include a tenant base made up mostly of start-ups; buildings outfitted for indoor cultivation that may be difficult to re-lease should tenants fail; and the specter of new regulations that could hamstring the medical marijuana industry, according the prospectus.

Despite these risks (and the desires of many who wish nobody smoked pot), marijuana will be a growth industry for the foreseeable future.

At some point, the novelty will wear off, and the health hazards will be emphasized more than the health benefits. Fifty years ago, many people smoked cigarettes, but today, very few do. Marijuana will enjoy a period of expansion and acceptance followed by a slow decline, but not before a lot of people get really high and many others get really rich.

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16 responses to “It’s high time for marijuana REITs”

A decade after the triple-A failures of the subprime era, grade inflation is back on Wall Street.

This time, Moody’s Investors Service and S&P Global Ratings Inc. are cutting companies slack on mergers and acquisitions, an analysis of credit-ratings data by Bloomberg News found.

Over the past year and a half, both have bumped up their ratings by two, three or even six levels on a majority of the biggest deals, the analysis found.

Moody’s and S&P don’t dispute those findings, which are based on ratings guidelines posted on their websites. But the firms say a by-the-numbers approach overlooks one of their most valuable assets: human judgment. Both make clear that their analysts have leeway to nudge ratings up or down, based on a company’s track record and their confidence in management’s commitment to reduce indebtedness.

“We want our analysts and committees to get behind the story and make their judgments about what they think the organization will look like in the next couple of years,” says Mark Puccia, a chief credit officer at S&P.

Ever since the Canadian city hit foreign home buyers with a 15% tax, hungry Chinese bargain hunters are looking elsewhere to invest in real estate. Their next target? Seattle.

“People who were thinking about investing in Vancouver have shifted their interest over here to Seattle,” said May Wan, a Seattle real estate agent who works primarily with buyers from Asia.

She recently worked with a client who was shopping in Vancouver and is now looking in Seattle.

Home prices in Vancouver had been exploding, jumping 25% since 2014, thanks largely to demand from foreign buyers. The city abruptly passed the tax in August in an effort to cool down the market.

The number of sales involving a foreigner buyer in Vancouver dropped to 0.7% in the month following the new tax, according to data from the British Columbia government. That’s a stark difference from the two months prior to the tax’s implementation, when foreign buyers made up 16.5% of all sales.

I refinanced in September and just received word that my mortgage was sold to Wells. I was actually happy to see that. I believe that in the wake of this scandal, they will be hyper-vigilant about proper internal compliance and providing excellent customer service. They can’t afford anymore bad press.

Then again, I’m not exactly the typical consumer. In the aftermath of Chipotle’s E-Coli outbreak, I started eating there more frequently, assuming that their supply chain standards would be higher than they ever been before. The shorter wait times and more generous portion sizes were just a bonus.

The last full day of the Mortgage Bankers Association annual conference is underway, and the latest revelation is increasing home prices may not be as threatening as many think.

Many studies, including today’s S&P CoreLogic Case-Shiller Home Price Index, show that home prices gains are up more than 5% nationally. While that’s true, the story changes when economists bring in other factors.

In fact, when adjusting for inflation and the amount of purchase power provided by low interest rates, home prices actually dropped in the past 16 years, First American Chief Economist Mark Fleming said in an interview with HousingWire.

“Contrary to popular opinion, housing isn’t getting more expensive,” Fleming said. “In fact, on a purchasing-power adjusted basis, housing is becoming more affordable.”

“Interest rate declines, combined with meaningful gains in incomes, have provided the consumer with greater buying power, which increases housing affordability,” he said. “The growth in consumer house-buying power is actually outpacing the increases in nominal prices driven by remarkably tight inventories.”

The amount of purchasing power is determined by many economic factors including interest rates, inflation and household income.

Since July 2006, real home prices decreased 41% as of August. They did, however, increase 0.8% from July, but decreased 2.6% from August 2015. Real home prices decreased 20.7% from January 2000.

This chart shows that while home prices are near housing boom peaks, affordability is actually much better off:

I don’t think it’s due to people losing their homes at this point. Millennials are the largest generation, but have the lowest home ownership rate in history. The increasing presence of Millennials in the calculation is expanding the denominator faster than the numerator can keep up, because the proportion of first time buyers is near a historic low. This will only reverse once Millennials start getting married, having kids and buying houses.

Nationally, it will probably reverse, but I suspect in California, the rate will continue dropping because we are providing homes at a rate lower than the rate of population growth. We aren’t even providing enough multi-family housing to meet our needs. Due to the high cost, most people will be forced into multi-family housing, so the percentage of those who remain will be increasingly living in rental housing.

The August data for S&P/Case-Shiller’s home price indices was released today, and it showed month-over-month growth of 0.42% for both the 10-city and 20-city composite indices. Year-over-year versus last August, the 10-city was up 4.33% while the 20-city was up 5.13%. As shown below, Phoenix, New York, Tampa, Dallas and Seattle grew the most month-over-month, while San Diego, Las Vegas, and Cleveland grew the least. New York was up the second most month-over-month, but it’s up the least year-over-year at just 1.73%.

Still waiting for this show to crash! Our landlord gave us an option to resign a 6 month lease or get an increase in rent, we opted for month to month but we haven’t received an increase yet! Maybe he forgot? We pay our rent early or on time and we don’t give him much trouble. Maybe he realized this…

I keep reading reports that the economy isn’t doing too well, this show has to end soon. I see more and more homeless in DTLA and near our home in La Crescenta. They are making their way north, increase in homelessness is a good indicator that the people struggling to survive is rising. I think the economy will start to take a dump after elections.

It could be the hottest outgrowth of the pot-conomy — highly lucrative for both investors and cannabis companies. The industrial real estate that houses pot production is in high demand, and it is about to become the first opportunity for investors large and small to get in on marijuana.

How? The biggest problem for cannabis growers and suppliers is an inability to get much-needed cash to grow both their products and their businesses. Since cannabis production and use is not legal under federal law, only state to state, most banks won’t lend to cannabis producers. Enter, the real estate angle.